Shareholders brace themselves for ‘Dieselgate’ at Volkswagen (VW)

It all started with a group of five scientists at the University of West Virginia. During live road tests, these scientists discovered that emissions from certain VW diesel engines exceeded limits set by the US Environmental Protection Agency (EPA). A larger probe by the EPA and the California Air Resources Board (CARB) corroborated these findings and found that VW had intentionally programmed its diesel engines to reduce nitrogen oxide levels during emissions testing in order to meet US standards. The ensuing scandal, made worse by the fact that the company shirked its responsibility to shareholders and intentionally hid these findings from the public for almost a year, culminated with the collapse in the share price and the resignation of Martin Winterkorn, its CEO and Ferdinand K. Piëch, its Chairman.

More troublingly, the automaker reneged on its previous promise to release the finding of an investigative report surrounding the scandal by law firm Jones Day in April 2016 citing ‘unacceptable risks’ that may ‘jeopardize’ its ongoing negotiations with the US Department of Justice (DOJ), EPA, CARB, and Attorneys General from fifty US states.

DSW, the German partner of ECGS expects a lively discussion at VW’s AGM scheduled for the 22nd of June in Hanover and where Dieselgate will surely take center stage

Following the failure to release the Jones Day report, DSW decided to act by requesting a special independent audit to be submitted to a vote as a shareholder proposal at the upcoming AGM.

The objective of this audit is firstly to investigate whether the boards of VW violated their duties with respect to their ad-hoc disclosure obligations and thereby harmed the company and its shareholders. Secondly, such an audit shall also include an assessment of whether the risk management and compliance system of VW was sufficiently reviewed and adequately adjusted, once the scandal became public.

Of course, the shareholders’ meeting will also bring up important questions on Corporate Governance: DSW opposes the election of the Chairman of the Supervisory Board Hans Dieter Pötsch, as he is the Company’s former CFO up until his appointment as Chairman on October 7, 2015 without an appropriate cooling-off period as recommended by the German Corporate Governance Code. Moreover, DSW has serious doubts whether as former CFO he will be the right person to bring light to the Diesel Affair since he was part of the very same Management Board during the time that the emissions violations took place. We condemn this egregious conflict of interest.

Finally, ECGS has serious concerns with respect to executive compensation. Although the Supervisory Board decided to withhold 30 % of the variable pay for 2015 for members of the Management Board, this decision came only after immense public pressure and scathing remarks against VW in the media. It is nothing short of outrageous that the bonus was not cancelled in its entirety but was instead just deferred for 3 years and could still reach up to 200 % of its target. Shareholders should note that the company took almost €16.9 billion in provisions directly as a result of the affair in 2015 and consequently reported a net loss of €1.4 billion. Since there is no explicit vote on directors’ pay, DSW recommends that shareholders vote against the approval of the discharge of both boards.

The same financial logic was used to recommend voting against the dividend which appears to be nothing more than a cynical ploy to ensure that VW’s three largest shareholders (Porsche Automobil Holding SE, the State of Lower Saxony and Qatar Holding) do not get diluted. It is important to note here that a failure to pay preferred dividends will grant preferred shareholders voting power at the 2017 AGM thereby reducing the control of the three largest shareholders from 89.2% to 57.2%.

The VW general meeting will be nothing short of intense, drawing the ire of minority shareholders, corporate governance activists, and other stakeholders alike. We expect this general meeting to be at the very least one of the most highly contested meetings this AGM season in Germany, if not all of Europe.

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